Making the most of your talent

pharmafile | May 27, 2004 | Feature | |   

The vast majority of pharma executives would argue that having a large number of products in any company's portfolio should be regarded as a welcome headache. After all, in this highly competitive industry, marketable medicines mean profits that can be channelled back into future research and development. The safest way of maintaining the company lifecycle is to have as many active product lifecycles running as possible.

But it's not just a case of keeping an endless conveyor belt of new products churning. Successful product portfolio management, essentially the art of making the most out of your products, has to take into account several different and sometimes conflicting factors. Many companies' portfolios stretch across a myriad of therapeutic areas, each consisting of sub-portfolios, which all have to be managed and utilised to maximum effect. Each one is screaming for a slice of the cake in terms of internal resource allocation and each has a strategy that needs to be developed.

Often perceived as a separate process through which the only the R&D and sales and marketing departments in a pharma company perform their decision making, the new creed of portfolio management can rather be defined as an integrated cross-functional framework that encompasses effective decision making and resource allocation across all departments of the company.

Optimising resources

Omar Chane, senior manager in the life sciences department at Cap Gemini Ernst & Young in the US defines product portfolio management as "finding the optimal allocation of resources plus all their initiatives to maximise the return to risk ratio." He says that over the last 15 years, pharma companies have been good at working out a decision-making process to support portfolio allocation across R&D projects, irrespective of which therapeutic focus they actually have.

"I think the pendulum has been swinging back and forth over the whole industry as to whether we organise across a therapeutic line or continue to focus across functional areas," he adds. "While most pharma companies do now have a therapeutic area focus, what I haven't seen yet is an effective portfolio allocation process that takes into account this notion of an overall therapeutic area strategy."

According to Lisa Anson, director of global marketing excellence at AstraZeneca, portfolio management is prevalent at three different levels. Firstly she agrees that it applies to therapeutic area: "This means managing a range of brands for the same customer group and developing a reputation broader than any brand, AstraZeneca Oncology being a good example. This should lower the costs of launch and access/marketing."

She also suggests that portfolio management works across the local company and here is generally more focused on optimising the investment mix and salesforce allocation across brands at different stages in their lifecycle to balance short-term sales with long-term sales.

Finally, she says portfolio management should function across R&D: "Again it has to balance competing resource requests across products in R&D/licensing at different stages to secure a balanced flow of new drugs to market while maintaining company margins."

The challenges of portfolio management

Consultant Barrie James at Pharma Strategy says that deft portfolio management should be a top-level corporate management job, but it is only now that many companies have realised this.

"The great problem is that everybody talks about portfolio management, but when it comes to actually doing it, nobody seems to be doing it right," he says.

He believes that one of the biggest challenges in portfolio management is to achieve a harmonious balance between R&D and sales and marketing departments. He points to the traditional headaches caused by some companies overlooking the fact that marketing a product should always begin at the concept stage and how the vastly different ethos of R&D executives to their marketing counterparts can often create problems.

Mr Chane accepts that the relationship between R&D and marketing has always been one of the great challenges of portfolio management, and says it is basically a matter of aligning the incentives of the various groups. He says that if the true objective of portfolio allocation is to maximise the lifetime value of compounds, then companies need to change the way they give incentives to departments.

"Instead of development teams being asked to merely provide submissions for such an indication by a certain deadline, really they should be asked to expand their horizons and think about the five additional submissions they will have to do over the next 10 to 15 years," he argues. "And likewise, the brand teams have to devise their lifecycle plan for the next 12 years rather than the next 12 months. It's all to do with the incentives and how you're measuring these people, because incentives drive behaviour. If companies don give the right incentives to their project teams to take the longer-term perspective, they're simply not going to take it.

"Just as marketing is too important to be left to the marketing people, I think product development's too important to be left to the R&D people," says Mr James. "There should be a body above both departments where the portfolio management decision is made."

Of course, the more enlightened companies already have this system in place. Project teams across R&D and marketing have long been running various scenarios on their projects and feeding the outcome analyses to a decision-making body. This body can be called anything from 'therapeutic area management committee' to 'portfolio management committee' depending on the company, but at whichever headquarters it resides, it basically performs the same functions.

According to Stephen Oxley, head of pharmaceuticals at KPMG UK, this body will decide the big trade-offs it can make in terms of internal investments or divestments of products.

"It's not just a question of putting field force X onto product Y," he explains. "It's very much about getting into individual levels of pricing, how pricing compares across different markets, timings of launches or whether one goes for additional indications in filings – there's a whole series of important factors to consider."

Ms Anson believes that companies should ideally install systems at a global and local level to make the most out of portfolio management: "At the global level, a prioritisation system across all functions is necessary. At the local level, it is all about resource allocation to optimise sales."

Mr Chane says the portfolio committee essentially determines what kind of resource allocation they wish to make. "What ends up happening is that there is a de facto resource allocation by therapeutic area which will be the aggregate of all the resources allocated to projects in a certain therapeutic area," he explains.

"What companies have just started asking themselves is what the effect on overall therapeutic strategy will be and whether it would be better to start with that first. As a result, companies are now determining first the optimal product lifecycle strategy that is going to support that therapeutic area strategy. That's a drastic departure from the way companies do it right now."

Maximising value from your products

If companies don't take this new perspective which brings up the longer-term notion of lifecycle management, they run the risk of value erosion, and in these trying times, that could be disastrous.

"If a company continues to just look at compounds individually and assess the different strategies that can be pursued for them without looking at the overall lifecycle management strategy, then they're not going to maximise the value of the overall franchise," says Mr Chane.

Ms Anson is of the opinion that the more successful companies are viewing portfolio management as a critical capability which gets a lot of attention at a global level.

"It's increasingly being seen as important at a local marketing company level to optimise portfolio resource allocation," she says. On the question of whether companies in the past have been too focused on isolated lifecycle review of individual products and still forecast and plan separately for each one, she replies that forecasts for each brand are still done separately.

"This will increasingly be an issue if the scenarios are not based on portfolio prioritisation status," she adds.

As is evident, portfolio management is the art of making the most out of all your assets and resources, whether they be products, patents or people. While this all sounds like good common sense and essential business practice, why is it that in the past the industry has been so guilty of overlooking the bigger picture?

Mr James says that beyond the usual argument that the industry has relied on high margins for most of its history, there is also the tendency for companies to fail to develop a long-term vision of their product, "one that encompasses 30 to 40 years of life".

"The constant personnel turnovers mean that many people in this industry don't stay in the same job for more than three years," he explains. "When you think that to get a fully developed product on the market can now take 18 years, it's easy to see why there's a lack of continuity. Projects have to be planned out well in advance and become part of the wallpaper."

Taking a product out of the portfolio

Perhaps one of the areas of portfolio management where pharma has consistently failed over the years is the touchy subject (particularly in the research labs) of killing off products.

It's a familiar story – research personnel are (rightly) proud of their development projects and want to see them become successful. Mr James contends that the industry does not do a good job of killing off projects early enough and as a result, millions of dollars are lost, especially if products make it into the expensive phase III stage before they are pulled.

"The problem is that the further these projects get down the line, the greater the reluctance to kill them off," he says. "Research doesn't like killing brain babies. People always seem to want just that one more trial.Of course, companies need to explore ways of pulling 'bad apple' projects in time to maximise the amount of money they can invest on winning products.

"The challenge here is that it's very hard for organisations to crack what they're doing as the R&D organisations are big, relatively fat and not really well managed," says Mr Chane. "Even if you cut resources for certain projects, people may continue to work on them and explore new possibilities for projects that were supposedly dead. The discipline is not there to follow through with the decision to kill the project and you can have situations where the CEO has to come in and say  'I thought we killed this sucker two years ago!'"

While there is an obvious connection between the huge product portfolios of the pharma big boys and the need for portfolio management, small and mid-size pharma cannot ignore its significance. Mr Chane says that for the pharma companies with just a tiny handful of products and the biotech companies relying on maybe just one or two products, it is actually even more important.

"In companies like these, many creative ideas are being generated on the research front and they won't be able to fund all of these to move into the development stage," he says.

"Therefore the notion of resource allocation takes on the dimension of external collaboration such as out-licensing – business development becomes an integral part of the lifecycle strategy."

The big question for the future concerns how portfolio management will continue to evolve. Mr Oxley sees greater sophistication along the line with bigger companies looking at therapeutic area groupings and considering how they apply to second or third generation products.

"There's still further to go," he enthuses. "Two areas where companies will continue to push will be the therapeutic franchise area and then on the other side, understanding product profitability and getting into understanding product cashflows and working capital issues around products. That for me is the evolution of product portfolio management."

Mr Chane wants to see companies paying more attention to maximising the amount of investment they make on existing marketed products: "Sometimes portfolio allocation is too focused on R&D – companies are still learning how to maximise the value of products already on the market."